Jari-Matti Latvala continues to lead the Rally Australia, but Sebastien Loeb is now only three seconds behind after mounting a charge on the second morning.

Early rain initially negated the expected advantage of running further down the order, as the dampness lessened the problem of loose gravel for those taking to the stages first.

It was Latvala's Ford team-mate Mikko Hirvonen who coped best with the slippery conditions on SS16, setting the quickest time and jumping from fifth to third despite a brief trip off the road which saw him wipe out a postbox.

But the weather cleared up before the day's second stage, and suddenly conditions were ideal for Loeb, whose Citroen was running fifth on the road. Back to back stage wins saw him fly up the order - as he took 17s out of Latvala's lead on the Bosch and Armor All stages.

Latvala beat him by a second on Urliup, but there was no doubt that the world champion had turned his hitherto disappointing weekend around and thrust himself right into contention for victory.

"It's been quite a good morning," said Loeb. "I've been pushing right on the limit, and maybe I've also found a better setting than I had, so I'm more confident with the car. It's going well so I hope I can continue like that."

Apart from a poor run through SS17, Latvala reckoned most of his time loss had been due to the stage conditions, which he hoped would be more favourable for him after the midday service.

"I lost a little bit too much time in the second stage this morning, but it was getting more and more dry, and my position running first on the road was getting more and more difficult," he said.

"The guys are catching me, but I hope I don't lose too much. It's not going to rain again, but it will be easier in the afternoon when we go through the stages for the second time."

Hirvonen has also continued to close in, and is now within 7.9s of the lead in third place.

"It's drying a bit too much, so it's really good for Sebastien as he's behind, but anything is still possible," he said. "It's going to be a big fight."

Friday star Sebastien Ogier (Citroen Junior) dropped back from the lead when he slid off the road on the wet SS16, but he recovered with minimal drama and is still only 10s behind Latvala in fourth place, and 6s clear of works Citroen driver Dani Sordo, who has felt less confident with his set-up and pace notes today.

"I did a mistake on the first stage this morning but the other stages were good for us, although we have had to clean the roads," said Ogier. "I think I did good stages given my [running order] position."

Henning Solberg remains sixth for Stobart Ford despite a trip off the road on SS17 that left him with an extremely battered car. Although he lost his windscreen among other parts, Solberg was able to continue at a reasonable pace, just ahead of his team-mate Matthew Wilson.

Munchi's Ford's Federico Villagra is now in a lonely eighth after Conrad Rautenbach retired his Citroen Junior car in a ditch on the final stage of the loop.

Hayden Paddon, who is driving a Group N Mitsubishi but is not registered for the Production class, therefore moved up to ninth ahead of top Production runner Martin Prokop, both having passed overnight class leader Richard Mason this morning.

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